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The IPO Class Of 2017: Snap Shouldn't Be A Lonely Unicorn

Unlike in several other recent vintages, the IPO Class of 2017 may not need to wait until the fall for a headliner.

With Snapchat parent Snap having reportedly filed confidential paperwork sometime in the fall, one of Silicon Valley’s high-profile unicorns could sell shares to the public in the first quarter. After a down year for new offerings in 2016, expectations are high that the ephemeral messaging app won't be alone and the window for IPOs seems to be wide open at the start of 2017.

“Stocks are at record highs, volatility is in check, rates are still low, even if they’re moving higher, and most importantly, this year’s IPOs have done well,” says Renaissance Capital’s director of research Paul Bard.

There were only 15 venture-backed tech IPOs in 2016, and 42 total in the U.S. That was partially a reflection of a somewhat tumultuous year for the stock market before the post-election rally sent major averages ripping higher.

Bard also thinks there was something of a “hangover” from a large crop of 2015 IPOs that disappointed in the months and quarters after their debuts. “The 2015 IPO class is down, with an S&P 500 that’s up.” In fact, Renaissance Capital found IPOs of 2015 vintage (down 4.9%) didn't just underperform the broader market last year, they trailed 2016 debuts (up 23.5%) by a wide margin as well.

In fairness the latter group still have something of a new-car smell, having released fewer (if any) quarterly report cards, but Bard thinks their timing has just as much to do with the outperformance.

A rolling correction through late 2015, hit a crescendo in the the first six weeks of 2016. Valuations were cut across multiple sectors, perhaps most severely in technology areas like cloud software. So a company like Pure Storage, which debuted in October 2015, was held to a higher standard and didn’t even get through its first trading day without dropping below its IPO price. That’s a stark contrast to tech startups Twilio or Nutanix, which debuted in June and September 2016, respectively, each doubling in short order.

Could Uber be on deck to go public this year? (Akos Stiller/Bloomberg)

Bard predicts a “wave of unicorn-type IPOs” over the next 12-18 months, while acknowledging that the recent past is littered with similar predictions, especially as a number of prospective IPO filers have continued to opt for private fundraising from venture capital and mutual fund investors rather than take the plunge.

A continued boom in M&A activity could also support the IPO market. Microsoft recently closed its $26 billion takeover of LinkedIn which, though it went public over five years ago, was a young, growing technology company. At least some of that capital could finds its way into the stocks of new entrants in the market, Bard suggests.

“It’s a moving target,” says Bard. “There’s the potential for a lot more tech activity, starting with Snap.”

The Snapchat parent's anticipated filing, as well as others like Appdynamics, which filed in late December, could help kick off a year that won't need to do much to mark a big improvement over 2016.

“We’re seeing the tech IPO bandwagon creep back to life,” says NYSE President Tom Farley, who says his team has been in discussions with companies on both the enterprise and consumer technology sides.

While a number of companies may have tried to avoid timing deals around the election, a few that did brave those waters were rewarded with strong debuts, including the launches of Trivago and Apollo-backed Athene in December.

Couple the encouraging market conditions with the fact that many richly-valued private companies have had more time to mature by delaying offerings, and a pickup in deals looks likely.

“Valuations were negatively impacted in late 2015 and early 2016,” Farley explains. “Tech unicorns needed some time to grow into valuation that may have been particularly bullish.”

Snap’s potential -- the company is said to be mulling a $4 billion offering that would value the business in the $20-$25 billion range -- could make for the biggest venture-backed technology company to hit the U.S. market since Alibaba in 2014.

The road to a splashy debut from Snap won't be without its twists -- like last week's lawsuit from a former employee alleging inflated growth metrics, a claim the company denies -- but other factors are more important than a single blockbuster for 2017's IPO prospects. Chief among them: the strong performance by the small group of unicorns that took the the leap in 2016.

Twilio shares are have fallen back to Earth since their rocket-like debut in July, but are still trading nearly double the IPO price, while Nutanix is [more than 60%] above its IPO price. Acacia Communications, which debuted in May, has returned almost 200%.

“It feels like 2017 might be closer to a ‘Goldilocks’ year,” says Corey Shull, lead Internet analyst at T. Rowe Price. Though the volume of deals was light in 2016, "in general new names have been well received," he adds. "I think you’ll have a year where a handful of large cap deals will come out, but not all of them.”

Even if just a few take their turn on the NYSE or Nasdaq stage, it will mark a strong pickup from a pair of disappointing years.

"There is an investor group ready to put money behind tech IPOs," says Silicon Valley Bank CEO Greg Becker, whose firm arranges financing and invests in a host of private technology companies. Still, he warns that it behooves companies on the fence to make sure they have things well arranged before taking the plunge, because correcting problems in the glare of the public market spotlight is stressful.

"You have to be confident in your growth rate; you can't stumble," says Becker. He also offers a note of caution for those buying the argument that the stock market's post-election rally signals confidence in a new era of pro-growth, business-friendly policy. "We haven't even started with the new administration yet," he warns.

The risks and benefits of going public are frequently discussed -- being subject to quarterly grilling over financial results and daily gyrations in the stock balanced against offering liquidity to investors and employees, and gaining a public currency for acquisitions -- but there are also risks to staying private for too long.

“For some companies it’s less about the market being open and more about the internal cadence and being at the right point in the business. Trying to retool your business as a public company is really challenging," agrees T. Rowe's Shull. “I think a lot of these companies aren’t going to reach what they think is their potential."

Research firm CB Insights, which maintains a roster of likely candidates in its annual IPO Pipeline Report, highlights 86 companies that have raised money at valuations of at least $1 billion. The firm lists usual suspects -- Uber, Airbnb, payments service Stripe, messaging platform Slack, grocery delivery app Instacart -- as unicorns with the most momentum, but ranks five others as the most likely to go public in 2017. Those firms: meal delivery service Blue Apron, research software company Qualtrics, identity software firm Okta and developer education platform Pluralsight.

Another early in the year debut should come from the aforementioned Appdynamics, which filed IPO paperwork over the holidays. It won't just be technology firms either. Blackstone's big bet on U.S. housing, Invitation Homes, unveiled its S-1 filing on Friday. Meanwhile other companies with paperwork on file include meat producer JBS Foods, CBS Radio and IT infrastructure firm Presidio. Renaissance Capital also highlights the likes of Vice Media, Parka maker Canada Goose and the U.S. arm of Dutch cable business Altice among its candidates for debuts in 2017.